module 7 Flashcards
CVP analysis
CVP analysis
concerned with the change in profits in response to changes in sales volumes, costs and prices
when will fixed costs PER UNIT decrease?
when the number of units produced increases
variable costs
Costs vary relative to the change in volume that is involved
VC per unit is…
constant
total VC decreases when…
volume decreases (direct relationship)
which costs stay constant?
total fixed costs
VC per unit
selling price per unit
relevant range
range of activity over which the cost behaviour is assumed to be valid.
mixed costs
have both fixed + variable cost components
what happens when activity is outside the relevant range?
expected behaviour costs will change
–> entity may be going through negotiations about contracts, or changing the level of resources required to support operating activities
2 assumptions about mixed costs
- That they can be separated into their fixed and variable portions.
- That those portions, when separated, are linear (like fixed and variable cost behaviour) within the relevant range of sales volume.
equation for total cost
FC + VC(x)
x = sales volume
high-low method for calculating VARIABLE costs per unit of activity (volume)
calculate the slope (y2-y1/x2-x1)
point 1: highest cost + activity
point 2: lowest cost + activity
broken down version of TC = FC + VC(x)
Total cost (at highest volume level
CVP assumptions
- The behaviour of costs can be neatly classified as fixed or variable.
- Cost behaviour is linear.
- Fixed costs remain ‘fixed’ over the time period and/or a given range of activity.
- Unit price and cost data remain constant over the time period and relevant range.
how can CVP data assist in decision making? (3 things)
- Identifying the number of products or services required to be sold to meet break-even or profit targets.
- Determining the impact on profit of changes in the mix of fixed and variable costs.
- Pricing products.
